Jobs numbers takeaway: we’re not at full employment

So we got the biggest monthly gain in non-farm payrolls last month. 313,000 was the headline number. Yet, the unemployment rate stayed at 4.1% and wage growth did not accelerate. My takeaway is that this is not the hallmark of an economy at full employment. But what will the Fed’s takeaway be?

Revisiting Brainard’s speech and lowflation

Although the economy is currently around full employment and has been expanding at an above-trend pace, inflation has remained subdued for quite some time. Over the past year, overall PCE (personal consumption expenditures) inflation was 1.7 percent, and core PCE inflation was 1.5 percent–not very different from the average level of core inflation over the past five years.

The persistence of subdued inflation, despite an unemployment rate that has moved below most estimates of its natural rate, suggests some risk that underlying inflation may have softened. While transitory factors no doubt played a role in last year’s step-down in core PCE inflation, various empirical analyses conclude that persistent factors are at play in the stubbornly low level of core inflation…

Thus, it is important for monetary policy to ensure that underlying inflation is re-anchored firmly at 2 percent…

Do you notice the phrase “around full employment”? Brainard is asking out loud: “If we’re at full employment, why isn’t inflation rising. There are four possible answers.

Transitory factors are holding inflation back

Embedded structural issues are now holding inflation back

Inflation doesn’t necessarily rise when we reach full employment

We’re not at full employment

I think we should give answers three and four more consideration than we do.

Revisiting Brainard’s speech and full employment

Then there’s this from Brainard:

It is difficult to know with precision how much slack remains in the labor market. If the unemployment rate were to continue to fall in the coming year at the same pace as in the past couple of years, it would reach levels not seen since the late 1960s. On the other hand, the employment-to-population ratio for prime-age workers remains more than 1 percentage point below its pre-crisis level. If substantially more workers could be drawn into the labor force, it would be possible for the labor market to firm notably further without generating imbalances. But it is an open question as to what portion of the prime-age Americans who are out of the labor force may prove responsive to tight labor market conditions because declining labor force participation among prime-age workers predates the crisis, especially for men.

My take: Today’s numbers tell you we aren’t really at full employment if the unemployment rate is unchanged after a big 313,000 jump in payrolls. Lots of people who are not in the labor force want to be.

In fact, if you look at the Household Survey upon which the unemployment rate is based, it says employment grew by an implausibly large 785,000 in February. The best way to interpret that number is by recognizing that people who weren’t counted as unemployed before are now getting jobs. That’s hidden unemployment.

And given the demographic forces pushing labor force particpation down, that tells you cycilcal forces are at work. And those forces are putting people who had dropped out of the labor force in jobs.

In fact, if you look at the total unemployed and include all marginally attached workers plus the total employed part time for economic reasons, the unemployment rate ticked up. That tells a different story than the full employment one.

We are not at full employment. Don’t give up on the people who have dropped out of the labor force. There are jobs waiting for them, if we allow this thing to run.

Editor’s Note: I have now fully updated this post. Additional commentary on average hourly earnings is now here.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.